HOW IS YOUR DEMAND
PLANNING METABOLISM?
By Patrick Bower
Increased competition, global
sourcing, too many new products,
and frequent price changes along
with promotional activities have
made the job of forecasting very
difficult … bloated forecasts can
lead to bad decisions because
of limited capacity and missed
opportunities … forecasters react
to good news much faster than to
bad news, causing upward bias in
forecasts.
S
everal months ago I went to my
doctor for a checkup, and he told
me I’d gained about four pounds
over the past two years. Using a chart on
the exam room wall, he explained that
I was now 12 pounds heavier than the
ideal body mass index for someone my
height. He then proceeded to tell me about
something called “metabolic syndrome.”
As the doctor explained it, metabolic
syndrome is triggered by excess—excess
weight to be precise. He said the extra
weight I was carrying could cause my
body to have raised resistance to insulin,
mismanaged good and bad cholesterol,
increased hypertension, a fatty liver, and a
damaged immune system and connective
tissues in my joints—especially in my
back.
The message was clear—allowing one
bodily component to slip out of control
creates opportunity for other systems to
fail as well. Without corrective action,
dessert was going to be my downfall. His
cure: lose weight.
18
According to my doctor, if I were to
lose just a few extra pounds, my body’s
organs would function more efficiently.
The sophisticated feedback and closed-
loop systems that make me tick would
collectively shift back into balance, and
PATRICK BOWER
Mr. Bower is an S&OP Practice
Director with Plan4Demand Solutions, a
global supply chain management services
firm, specializing in the implementation
of enterprise-wide Sales and Operations
Planning (S&OP) process. He has led
many full-life-cycle S&OP initiatives
and implemented S&OP standards and
tools for multinational corporations,
including Snapple, Bayer, Glaxo,
Fairchild Semi-Conductor, Cadbury,
Michelin, and World Kitchen. With over
25 years of manufacturing and supply
chain experience, he has developed,
implemented, and managed a variety
of manufacturing and supply chain
systems for companies such as Unisys,
Mobil, and Kraft Foods.
THE JOURNAL OF BUSINESS FORECASTING, SPRING 2007
I would probably live a longer, healthier
life.
And so on the ride home, after committing
myself to losing the extra weight, I started
thinking about my doctor’s advice in terms
of what I see transpiring on a daily basis in
the supply chains of our business clients.
I realized his description of my potential
health problems was an apt metaphor for
what we call forecast “bloat.”
TOO MUCH JUNK IN THE
FORECAST TRUNK
Because supply chains have become
so much more complex over the past 10
years, forecast accuracy has become more
vital to the success or failure of supply
chain operations. All the following factors
heighten the urgency to accurately predict
demand, but they also make the task of
predicting demand exponentially more
difficult.
• Increased competition
• Global sourcing
• Stakeholder pressures
• Never-ending new product introduct-
ions
• Government regulations
• More frequent price changes and
heightened promotional activities
A growing number of people have
responded to this increased complexity
and uncertainty with a typical knee-jerk
reaction, which is, to over-forecast. If
you think of this solution in terms of our
healthcare metaphor, it’s like choosing
to take pills to treat high cholesterol,
hypertension, and insulin resistance rather
than just losing excess weight.
BAD FORECASTS =
BAD PLANNING
Just as your brain controls your body,
forecasts control supply chains. If your
brain transmits a flawed signal, your
body will experience or exhibit some
corresponding system failure. Similarly,
if the accuracy of your supply chain
forecast is significantly flawed it will
trigger a spasmodic response somewhere
throughout your supply chain. Just as a
bad forecast can cause a ripple effect of
bad supply plans downstream, a bloated
forecast can cause over-ordering of raw
and pack merchandise, a misallocation
of production resources, increased
inventory hold times, and excess/obsolete
inventory.
It’s possible, of course, to argue the
importance of many other factors as being
central to supply chain management.
For example, inventory management is
without a doubt a critical discipline, but
when you consider a simple question like:
“How do you know how much to build?”
you find yourself back on the subject of
forecasts.
Are you thinking about using a linear
program for strategic supply chain design?
The demand input is normally a forecast.
The same goes for production scheduling,
logistics, deployment, or procurement—
all rely upon some internal demand
mechanism or signal that brings you back
to the same subject—the forecast.
In a well-controlled environment, an
overstated forecast typically does not pose
a huge problem since other supply chain
functions, like inventory management,
will catch the excess demand and stop
Production and Procurement from
making or building excess inventory.
The assumption being, of course, that all
such processes are running well enough to
catch the problem before it manifests itself
in the form of bad planning. But that’s a
broad leap of faith.
THE JOURNAL OF BUSINESS FORECASTING, SPRING 2007
Furthermore, a persistent positively
biased forecast is still full of error, and
error is part of the equation for most
safety stock calculations. So even if the
excess is caught, the error alone will have
some lasting impact on inventory. And
when capacity is tight, a bloated forecast
will likely result in bad decisions about
the use of limited capacity and missed
opportunities somewhere else.
TESTING FOR
FORECAST BLOAT
So, how do you know if your forecasts
are bloated? Just as a doctor runs tests to
look for indicators of health problems, the
same way supply chain managers examine
forecasts to spot problems.
While there are no definitive “symptoms”
of bloat—only indicators—if you answer
“yes” to most of the following questions,
it’s likely your forecast needs dieting.
• Does your forecast have a persistent
positive bias?
• Are forecast misses “rolled” or spread
into the latter part of the year?
• Do top-down directions on the forecast
supersede the forecasts generated by
the professional forecaster?
• Are unrealistic sales or financial plans
imbedded into the forecast?
• Are new product forecasts almost
always aspirational (or overstated)?
• Do you have a great deal of aged
or obsolete raw, pack, and finished
goods?
• Do you have more inventory than you
need, even though customer service
levels are low or declining?
NATURALLY
OCCURRING BLOAT
Just as having a little body fat is not
harmful, industry research has shown
that it’s normal for forecasts to have a
naturally occurring positive bias. The
analysis of forecasting behaviors shows
that forecasters of all stripes tend to
react rapidly and positively to good
news yet much slower to bad news. The
psychology associated with this tendency
leads to inherent positive bias in forecasts.
Therefore, when trying to remove bloat
from a forecast, this bias is an obstacle to
be overcome.
Another cause of bias in an organization
is an “I think I can...” mentality that often
leads to an aspirational forecast. Sales
and Marketing typically provide the most
“I think I can…” forecasts; these tend to
be positively biased, with inherent—and
often unchallenged—growth assumptions.
Momentum and aspirations aside,
these forecasts should be challenged to
determine if there are underlying facts to
support the volumes in the forecast.
THE CURE FOR BLOAT:
A FORECAST DIET
There are many ways to reduce forecast
bloat, but the all-important first step is
committing to a reality-based forecast.
“Getting real” with your forecast describes
the constant, ongoing challenge of
determining whether your forecast can be
supported by hard facts, the best statistics,
solid judgmental input, and believable
market assumptions. Getting real does not
include:
• Using the budget as your demand
plan
• “Peanut butter spreading,” a top-
down volume assumption
• Using best-guess or seat-of-the-pants
estimates to determine the future
When it comes to forecast review, the
best thing to do is to have an attitude
embodied in the Missouri state slogan:
show me. That is, all significant forecast
changes should have explanations based
on hard facts.
If forecasts differ from historical trend-
ing, ask “Why?” And if you don’t like the
answer, ask “Why?” again. In fact, adopting
the “Five-Why” process from the contin-
19
uous-improvement discipline is a great
way to understand forecast deviations.
Once you resolve to “get real” about fore-
casting, the process of reducing forecast bloat
is no different than dieting to lose weight.
You need to set a goal, establish a support
group, or maybe even engage a professional
to assist you—a forecast “nutritionist,” if
you will, or a “personal trainer.”
To get started with your own reduction
plan, consider these seven specific areas
associated with demand planning, each of
which deserves particular attention:
1. Error reporting is essential to under-
standing the presence and source of
errors. Improving forecast bloat can
be as simple as error reporting with
multiple “cuts” across the product
and sales hierarchy to determine
where the error is the greatest. These
instances of high error then need an
active challenge to determine why.
2. Analyze the error. Forecast error can
occur naturally or it can be created
by erroneous judgmental input. Only
careful analysis will indicate the
root cause of a problem. Measure
the statistical forecast as well as
judgmental overlay. Reporting bias—
with special emphasis on forecasts that
are positively skewed—is essential to
removing bloat.
3. Teamwork is essential to understanding
error. A collaborative demand consensus
process will generate more accurate
forecasts and enable a forum for active
challenges of erroneous forecasts.
4. The latest estimate should be com-
pared to the prior version of the
forecast to determine forecast
changes. Large deviations “rolled”
into the latter part of the year tend to
be one of the most significant sources
of forecast bloat.
5. Exception processing is essential
to accurate forecasting. Reviewing
every item every month within the
forecast cycle is overkill. But detailed
20
analysis of exceptions and causality
tends to yield immediate, long-term
improvement in the forecast process.
6. Statistical tools should be managed
for peak performance. Runaway
statistics or overactive models can
create incredibly wrong forecasts. We
often find the parameter settings and
configuration of these tools to be one
of the biggest hurdles to overcome.
The users of statistical engines
need to think of statistical forecast
engines being similar to Jaguars (the
car)–which are notorious for needing
almost constant tuning. An un-tuned
Jaguar will sputter and spurt. So too
will a statistical forecast engine if left
untuned. Unfortunately, many people
are unaware of the need to tune these
engines and often wrongly conclude that
statistical forecasts are not good when,
in fact, simply reviewing statistics and
making a few tweaks on a monthly
basis can significantly improve them.
7. Straight talk is critical to removing
forecast bloat. Straight talk is the active
challenging process of questioning
the validity of a forecast based on
facts and knowledge. For example, if
the trend for Product Line A has been
+5% over the past year, then why is it
suddenly +15%? Straight talk requires
an approach to consensus forecasting
based on maturity and continuous
improvement.
THE SOLUTION IS CLEAR:
EAT LESS
Just as dieting can help you lose weight,
reducing forecast bloat is a challenge you
can manage on your own, but the reality
is often more difficult than it sounds.
That’s why we have developed a Demand
Excellence ModelTM to help organizations
adopt and embrace a forecast diet. The
approach is designed to help supply chain
leaders methodically reduce forecast error
by incorporating analysis, discipline, and
process improvements into their demand
planning processes. The benefits are a
healthier supply chain and bottom line. 
THE JOURNAL OF BUSINESS FORECASTING, SPRING 2007
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